INCOME TAX EXEMPT ORGANIZATIONS EXCISE TAX …

[Pages:10]Bulletin No. 2002?42 October 21, 2002

HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

INCOME TAX

EXEMPT ORGANIZATIONS

Notice 2002?66, page 715. This notice extends through the end of calendar year 2002 the transitional documentation and reporting relief for foreign partnerships, Qualified Intermediaries (QIs), and U.S. withholding agents specified in Notice 2001?4.

Notice 2002?67, page 715. Gain or loss; payments to peanut quota holders. Information is provided, in a question and answer format, to holders of peanut quotas regarding the tax treatment of federal payments made under section 1309 of the Farm Security and Rural Investment Act of 2002.

Announcement 2002?94, page 727. This document contains corrections to proposed regulations (REG?136311?01, 2002?36 I.R.B. 485) that explain when a foreign corporation engaged in the international operation of ships or aircraft may exclude its U.S. source income from gross income for U.S. federal income tax purposes.

Rev. Proc. 2002?64, page 717. This procedure provides a modified and supplemented list of Indian tribal governments that are to be treated similarly to states for specified purposes under the Internal Revenue Code. This list has been coordinated with the list of recognized tribes published by the Department of Interior, Bureau of Indian Affairs. Rev. Proc. 2001?15 superseded.

EXCISE TAX

Announcement 2002?95, page 727. This document contains a notice of public hearing scheduled for February 27, 2003, on proposed regulations (REG?103829? 99, 2002?27 I.R.B. 59) relating to the definition of a highway vehicle for purposes of various excise taxes.

ADMINISTRATIVE

EMPLOYEE PLANS

Rev. Rul. 2002?62, page 710. Substantially equal periodic payments; premature distributions. This ruling provides that a change to the required minimum distribution method of calculating substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) of the Code will not generate additional income tax under section 72(t)(1). Notice 89?25 modified.

Notice 2002?66, page 715. This notice extends through the end of calendar year 2002 the transitional documentation and reporting relief for foreign partnerships, Qualified Intermediaries (QIs), and U.S. withholding agents specified in Notice 2001?4.

Rev. Proc. 2002?66, page 724. Penalties; substantial understatement. Guidance is provided concerning when information shown on a return in accordance with the applicable forms and instructions will be adequate disclosure for purposes of reducing an understatement of income tax under section 6662(d) of the Code. Rev. Proc. 2001?52 updated.

Finding Lists begin on page ii.

The IRS Mission

Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are consolidated semiannually into Cumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court

decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I. -- 1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986.

Part II.--Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports.

Part III.--Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury's Office of the Assistant Secretary (Enforcement).

Part IV.--Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate. For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

October 21, 2002

2002?42 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 72.--Annuities; Certain Proceeds of Endowment and Life Insurance Contracts

Substantially equal periodic payments; premature distributions. This ruling provides that a change to the required minimum distribution method of calculating substantially equal periodic payments within the meaning of section 72(t)(2)(A)(iv) of the Code will not generate additional income tax under section 72(t)(1). Q&A?12 of Notice 89?25 modified.

Rev. Rul. 2002?62

SECTION 1. PURPOSE AND BACKGROUND

.01 The purpose of this revenue ruling is to modify the provisions of Q&A?12 of Notice 89?25, 1989?1 C.B. 662, which provides guidance on what constitutes a series of substantially equal periodic payments within the meaning of ? 72(t)(2)(A)(iv) of the Internal Revenue Code from an individual account under a qualified retirement plan. Section 72(t) provides for an additional income tax on early withdrawals from qualified retirement plans (as defined in ? 4974(c)). Section 4974(c) provides, in part, that the term "qualified retirement plan" means (1) a plan described in ? 401 (including a trust exempt from tax under ? 501(a)), (2) an annuity plan described in ? 403(a), (3) a tax-sheltered annuity arrangement described in ? 403(b), (4) an individual retirement account described in ? 408(a), or (5) an individual retirement annuity described in ? 408(b).

.02 (a) Section 72(t)(1) provides that if an employee or IRA owner receives any amount from a qualified retirement plan before attaining age 591/2, the employee's or IRA owner's income tax is increased by an amount equal to 10-percent of the amount that is includible in the gross income unless one of the exceptions in ? 72(t)(2) applies.

(b) Section 72(t)(2)(A)(iv) provides, in part, that if distributions are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life ex-

2002?42 I.R.B.

pectancy) of the employee and beneficiary, the tax described in ? 72(t)(1) will not be applicable. Pursuant to ? 72(t)(5), in the case of distributions from an IRA, the IRA owner is substituted for the employee for purposes of applying this exception.

(c) Section 72(t)(4) provides that if the series of substantially equal periodic payments that is otherwise excepted from the 10-percent tax is subsequently modified (other than by reason of death or disability) within a 5-year period beginning on the date of the first payment, or, if later, age 591/2, the exception to the 10-percent tax does not apply, and the taxpayer's tax for the year of modification shall be increased by an amount which, but for the exception, would have been imposed, plus interest for the deferral period.

(d) Q&A?12 of Notice 89?25 sets forth three methods for determining whether payments to individuals from their IRAs or, if they have separated from service, from their qualified retirement plans constitute a series of substantially equal periodic payments for purposes of ? 72(t)(2)(A)(iv).

(e) Final Income Tax Regulations that were published in the April 17, 2002, issue of the Federal Register (T.D. 8987, 2002?19 I.R.B. 852) under ? 401(a)(9) provide new life expectancy tables for determining required minimum distributions.

SECTION 2. METHODS

.01 General rule. Payments are considered to be substantially equal periodic payments within the meaning of ? 72(t)(2)(A)(iv) if they are made in accordance with one of the three calculations described in paragraphs (a) ? (c) of this subsection (which is comprised of the three methods described in Q&A?12 of Notice 89?25).

(a) The required minimum distribution method. The annual payment for each year is determined by dividing the account balance for that year by the number from the chosen life expectancy table for that year. Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payments are redetermined for each year. If this method is chosen, there will not be deemed to be a modification in the series of substantially equal periodic payments, even if the amount of payments changes from year to

710

year, provided there is not a change to another method of determining the payments.

(b) The fixed amortization method. The annual payment for each year is determined by amortizing in level amounts the account balance over a specified number of years determined using the chosen life expectancy table and the chosen interest rate. Under this method, the account balance, the number from the chosen life expectancy table and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year.

(c) The fixed annuitization method. The annual payment for each year is determined by dividing the account balance by an annuity factor that is the present value of an annuity of $1 per year beginning at the taxpayer's age and continuing for the life of the taxpayer (or the joint lives of the individual and beneficiary). The annuity factor is derived using the mortality table in Appendix B and using the chosen interest rate. Under this method, the account balance, the annuity factor, the chosen interest rate and the resulting annual payment are determined once for the first distribution year and the annual payment is the same amount in each succeeding year.

.02 Other rules. The following rules apply for purposes of this section.

(a) Life expectancy tables. The life expectancy tables that can be used to determine distribution periods are: (1) the uniform lifetime table in Appendix A, or (2) the single life expectancy table in ? 1.401(a)(9)?9, Q&A?1 of the Income Tax Regulations or (3) the joint and last survivor table in ? 1.401(a)(9)?9, Q&A?3. The number that is used for a distribution year is the number shown from the table for the employee's (or IRA owner's) age on his or her birthday in that year. If the joint and survivor table is being used, the age of the beneficiary on the beneficiary's birthday in the year is also used. In the case of the required minimum distribution method, the same life expectancy table that is used for the first distribution year must be used in each following year. Thus, if the taxpayer uses the single life expectancy table for the required minimum distribution method in the first distribution year, the same table must be used in subsequent distribution years.

October 21, 2002

(b) Beneficiary under joint tables. If the joint life and last survivor table in ? 1.401(a)(9)?9, Q&A?3, is used, the survivor must be the actual beneficiary of the employee with respect to the account for the year of the distribution. If there is more than one beneficiary, the identity and age of the beneficiary used for purposes of each of the methods described in section 2.01 are determined under the rules for determining the designated beneficiary for purposes of ? 401(a)(9). The beneficiary is determined for a year as of January 1 of the year, without regard to changes in the beneficiary in that year or beneficiary determinations in prior years. For example, if a taxpayer starts distributions from an IRA in 2003 at age 50 and a 25-year-old and 55year-old are beneficiaries on January 1, the 55-year-old is the designated beneficiary and the number for the taxpayer from the joint and last survivor tables (age 50 and age 55) would be 38.3, even though later in 2003 the 55-year-old is eliminated as a beneficiary. However, if that beneficiary is eliminated or dies in 2003, under the required minimum distribution method, that individual would not be taken into account in future years. If, in any year there is no beneficiary, the single life expectancy table is used for that year.

(c) Interest rates. The interest rate that may be used is any interest rate that is not more than 120 percent of the federal mid-term rate (determined in accordance with ? 1274(d) for either of the two months immediately preceding the month in which the distribution begins). The revenue rulings that contain the ? 1274(d) federal midterm rates may be found at taxpros/lists/0,,id=98042,00.html.

(d) Account balance. The account balance that is used to determine payments must be determined in a reasonable manner based on the facts and circumstances. For example, for an IRA with daily valuations that made its first distribution on July 15, 2003, it would be reasonable to determine the yearly account balance when using the required minimum distribution method based on the value of the IRA from December 31, 2002, to July 15, 2003. For subsequent years, under the required minimum distribution method, it would be reasonable to use the value either on December 31 of the prior year or on a date within a reasonable period before that year's distribution.

(e) Changes to account balance. Under all three methods, substantially equal periodic payments are calculated with respect to an account balance as of the first valuation date selected in paragraph (d) above. Thus, a modification to the series of payments will occur if, after such date, there is (i) any addition to the account balance other than gains or losses, (ii) any nontaxable transfer of a portion of the account balance to another retirement plan, or (iii) a rollover by the taxpayer of the amount received resulting in such amount not being taxable.

.03 Special rules. The special rules described below may be applicable.

(a) Complete depletion of assets. If, as a result of following an acceptable method of determining substantially equal periodic payments, an individual's assets in an individual account plan or an IRA are exhausted, the individual will not be subject to additional income tax under ? 72(t)(1) as a result of not receiving substantially equal periodic payments and the resulting cessation of payments will not be treated as a modification of the series of payments.

(b) One-time change to required minimum distribution method. An individual who begins distributions in a year using either the fixed amortization method or the fixed annuitization method may in any subsequent year switch to the required minimum distribution method to determine the payment for the year of the switch and all subsequent years and the change in method will not be treated as a modification within the meaning of ? 72(t)(4). Once a change is made under this paragraph, the required minimum distribution method must be followed in all subsequent years. Any subsequent change will be a modification for purposes of ? 72(t)(4).

SECTION 3. EFFECTIVE DATE AND TRANSITIONAL RULES

The guidance in this revenue ruling replaces the guidance in Q&A?12 of Notice 89?25 for any series of payments commencing on or after January 1, 2003, and may be used for distributions commencing in 2002. If a series of payments commenced in a year prior to 2003 that satisfied ? 72(t)(2)(A)(iv), the method of calculating the payments in the series is permitted to be changed at any time to the required minimum distribution method de-

scribed in section 2.01(a) of this guidance, including use of a different life expectancy table.

SECTION 4. EFFECT ON OTHER DOCUMENTS

Q&A?12 of Notice 89?25 is modified.

SECTION 5. REQUEST FOR COMMENTS

The Service and Treasury invite comments with respect to the guidance provided in this revenue ruling. Comments should reference Rev. Rul. 2002?62.

Comments may be submitted to CC:ITA:RU (Rev. Rul. 2002?62, room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Comments may be hand delivered between the hours of 8:30 a.m. and 5 p.m. Monday to Friday to: CC:ITA:RU (Rev. Rul. 2002?62), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, D.C. Alternatively, comments may be submitted via the Internet at ments@irscounsel. . All comments will be available for public inspection and copying.

Drafting Information

The principal author of this revenue ruling is Michael Rubin of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact Mr. Rubin at 1?202?283?9888 (not a tollfree number).

October 21, 2002

711

2002?42 I.R.B.

Taxpayer's Age

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62

2002?42 I.R.B.

Appendix A Uniform Lifetime Table

Life Expectancy

86.2 85.2 84.2 83.2 82.2 81.2 80.2 79.2 78.2 77.3 76.3 75.3 74.3 73.3 72.3 71.3 70.3 69.3 68.3 67.3 66.3 65.3 64.3 63.3 62.3 61.4 60.4 59.4 58.4 57.4 56.4 55.4 54.4 53.4 52.4 51.5 50.5 49.5 48.5 47.5 46.5 45.5 44.6 43.6 42.6 41.6 40.7 39.7 38.7 37.8 36.8 35.8 34.9

Taxpayer's Age

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115

712

Life Expectancy

33.9 33.0 32.0 31.1 30.2 29.2 28.3 27.4 26.5 25.6 24.7 23.8 22.9 22.0 21.2 20.3 19.5 18.7 17.9 17.1 16.3 15.5 14.8 14.1 13.4 12.7 12.0 11.4 10.8 10.2 9.6 9.1 8.6 8.1 7.6 7.1 6.7 6.3 5.9 5.5 5.2 4.9 4.5 4.2 3.9 3.7 3.4 3.1 2.9 2.6 2.4 2.1 1.9

October 21, 2002

Appendix B Mortality Table Used to Formulate the Single Life Table in ? 1.401(a)(9)?9, Q&A?1

age

qx

lx

age

qx

lx

0

0.001982

1000000

58

0.004736

941078

1

0.000802

998018

59

0.005101

936621

2

0.000433

997218

60

0.005509

931843

3

0.000337

996786

61

0.005975

926709

4

0.000284

996450

62

0.006512

921172

5

0.000248

996167

63

0.007137

915173

6

0.000221

995920

64

0.007854

908641

7

0.000201

995700

65

0.008670

901505

8

0.000222

995500

66

0.009591

893689

9

0.000241

995279

67

0.010620

885118

10

0.000259

995039

68

0.011778

875718

11

0.000277

994781

69

0.013072

865404

12

0.000292

994505

70

0.014519

854091

13

0.000306

994215

71

0.016139

841690

14

0.000318

993911

72

0.017950

828106

15

0.000331

993595

73

0.019958

813241

16

0.000344

993266

74

0.022198

797010

17

0.000359

992924

75

0.024699

779318

18

0.000375

992568

76

0.027484

760070

19

0.000392

992196

77

0.030582

739180

20

0.000411

991807

78

0.034010

716574

21

0.000432

991399

79

0.037807

692203

22

0.000454

990971

80

0.042010

666033

23

0.000476

990521

81

0.046652

638053

24

0.000501

990050

82

0.051766

608287

25

0.000524

989554

83

0.057392

576798

26

0.000547

989035

84

0.063583

543694

27

0.000567

988494

85

0.070397

509124

28

0.000584

987934

86

0.077892

473283

29

0.000598

987357

87

0.086124

436418

30

0.000608

986767

88

0.095238

398832

31

0.000615

986167

89

0.105068

360848

32

0.000619

985561

90

0.115518

322934

33

0.000622

984951

91

0.126487

285629

34

0.000625

984338

92

0.137876

249501

35

0.000629

983723

93

0.149419

215101

36

0.000636

983104

94

0.161176

182961

37

0.000657

982479

95

0.173067

153472

38

0.000696

981834

96

0.185008

126911

39

0.000749

981151

97

0.196920

103431

40

0.000818

980416

98

0.210337

83063.4

41

0.000904

979614

99

0.224861

65592.1

42

0.001007

978728

100

0.241017

50843.0

43

0.00113

977742

101

0.259334

38589.0

44

0.00127

976637

102

0.280356

28581.6

45

0.001426

975397

103

0.303142

20568.6

46

0.001597

974006

104

0.329482

14333.4

47

0.001783

972451

105

0.359886

9610.80

48

0.001979

970717

106

0.394865

6152.01

49

0.002187

968796

107

0.434933

3722.80

50

0.002409

966677

108

0.480599

2103.63

51

0.002646

964348

109

0.532376

1092.63

52

0.002896

961796

110

0.590774

510.940

53

0.003167

959011

111

0.656307

209.090

54

0.003453

955974

112

0.729484

71.8628

55

0.003754

952673

113

0.810817

19.4400

56

0.004069

949097

114

0.900819

3.67772

57

0.004398

945235

115

1.000000

0.364760

October 21, 2002

713

2002?42 I.R.B.

Section 103(c).--Definition. Interest on State and Local Bonds

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 105(e).--Amounts Received Under Accident and Health Plans

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 117(b)(2)(A).-- Qualified Scholarships

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 164.--Taxes

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 511(a)(2)(B).-- Imposition of Tax on Unrelated Business Income of Charitable, etc., Organizations -- Organizations Subject to Tax

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 2055.--Transfers for Public, Charitable, and Religious Uses

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 2106(a)(2).--Taxable Estate -- Transfers for Public, Charitable, and Religious Uses

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4483(a).-- Exemptions

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4911.--Tax on Excess Expenditures to Influence Legislation

For what purposes are Indial tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4940(c).--Excise Tax Based on Investment Income -- Net Investment Income Defined

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4941(d).--Taxes on Self-Dealing

Section 170.--Charitable, etc., Contributions and Gifts

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 403(b)(1)(A)(ii).-- Taxation of Employee Annuities --Taxability of Beneficiary Under Annuity Purchased by Section 501(c)(3) Organization or Public School

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 454(b)(2).--Obligations Issued at Discount -- Short-Term Obligations Issued on Discount Basis

For what purposes are Indial tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 2522.--Charitable and Similar Gifts

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4041(g).--Retail Excise Taxes -- Special Fuels -- Other Exceptions

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4216.--Definition of Price

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4253(i).--Exemptions -- State and Local Governmental Exemption

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4942(f).--Taxes on Failure to Distribute Income -- Adjusted Net Income

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4945(f).--Taxes on Taxable Expenditures -- Nonpartisan Activities Carried on by Certain Organizations

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

Section 4946(c).--Definitions and Special Rules -- Government Official

For what purposes are Indian tribal governments treated as states? See Rev. Proc. 2002?64, page 717.

2002?42 I.R.B.

714

October 21, 2002

Part III. Administrative, Procedural, and Miscellaneous

Extension of Transition Relief for Foreign Partnerships and Their Withholding Agents Under Notice 2001?4

Notice 2002?66

SECTION 1. PURPOSE

This notice extends the transitional documentation and reporting relief specified in Section IV of Notice 2001?4, 2001?1 C.B. 267, for foreign partnerships, Qualified Intermediaries (QI), and U.S. withholding agents through the end of calendar year 2002.

SECTION 2. BACKGROUND

In T.D. 8734, 1999?1 C.B. 455, as modified by T.D. 8881, 2000?1 C.B. 1158, the IRS issued comprehensive regulations (withholding regulations) under sections 1441? 1446 and 6041?6050S of the Internal Revenue Code (the Code). These regulations became effective January 1, 2001. Under the withholding regulations, as well as the qualified intermediary withholding agreement (QI Agreement), a foreign partnership generally is treated as a flowthrough entity. Therefore, prior to receiving a payment, it must provide a withholding agent, including a QI, with a Form W?8IMY together with documentation from each partner and a withholding statement that allocates the payment to each of the partners in the partnership.

The IRS recognizes that, under these rules, the withholding agent may receive a high volume of documentation and may therefore experience significant processing problems. The withholding regulations address this problem by allowing a foreign partnership to become a withholding foreign partnership under an agreement with the IRS similar to the QI Agreement. A withholding foreign partnership generally would not be required to provide documentation for its partners to the withholding agent.

As transition relief, pending the publication of a model agreement for entering into a withholding foreign partnership arrangement, the IRS issued Notice 2001?4, applicable to calendar year 2001. Notice 2001?4 allowed foreign partnerships to pro-

vide the withholding agent with a withholding statement based on withholding rate pools, along with certain other documentation. In addition, under Notice 2001?4, the required documentation for partners that were foreign persons or U.S. exempt recipients could be provided to the withholding agent at any time during the calendar year 2001.

In Notice 2002?41, 2002?24 I.R.B. 1153, the IRS published proposed guidance for entering into a withholding foreign partnership (WP) or withholding foreign trust (WT) agreement. These proposed WP and WT agreements addressed the unique features of partnerships and trusts by adopting tailored procedures for documentation, reporting, and audit that were intended to facilitate compliance and reduce administrative and audit costs.

To allow time for comments on the proposed WP and WT agreements, the IRS has determined that it is appropriate to extend the transition relief for foreign partnerships under Section IV of Notice 2001?4 to calendar year 2002. The IRS anticipates that it will finalize the WP and WT agreements in the near future and will enter into WP and WT agreements with foreign partnerships and trusts in 2003. Such partnerships and trusts will be able to function as WPs or WTs as of the beginning of 2003. The transition relief for foreign partnerships under Section IV of Notice 2001?4 will be rendered obsolete when the guidance for entering into a WP agreement is finalized. Accordingly, this notice will extend the relief provided in Section IV of Notice 2001?4, through the end of calendar year 2002.

SECTION 3. TRANSITION RELIEF

Under the transition relief of Section IV of Notice 2001?4, as extended by this notice, for calendar year 2002, the IRS will permit a foreign partnership to provide a withholding agent, including a QI, with a Form W?8IMY together with a withholding statement that provides the withholding agent with information regarding withholding rate pools. The foreign partnership must provide a separate withholding rate pool for each U.S. non-exempt recipient partner. The foreign partnership must associate the documentation from each of its partners with the Form W?8IMY. If

a partner is a foreign person or a U.S. exempt recipient (e.g., a corporation), that documentation may be provided to the withholding agent at any time during calendar year 2002. If a partner is a U.S. non-exempt recipient, a Form W?9 must be provided before a payment is made to a partnership. For more detailed information regarding this transition relief, see Section IV of Notice 2001?4.

CONTACT INFORMATION

The principal author of this notice is Marc J. Korab of the Office of the Associate Chief Counsel (International), Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, D.C. 20224. For further information regarding this notice, contact Mr. Korab at 202?622?3840 (not a toll-free call).

Tax Treatment of Payments Made Under the USDA Peanut Quota Buyout Program

Notice 2002?67

PURPOSE

This notice provides answers to frequently asked questions regarding the tax treatment of federal payments made pursuant to ? 1309 of the Farm Security and Rural Investment Act of 2002, Pub. L. No. 107?171, 116 Stat. 134, 179 (2002) (the Act).

BACKGROUND

Section 1309(a)(1) of the Act repeals the marketing quota programs for peanuts in part VI of subtitle B of title III of the Agricultural Adjustment Act of 1938, as amended (7 U.S.C. ?? 1357?1359a). The repeal is effective May 13, 2002, the date the Act became law.

Section 1309(b)(1) of the Act directs the United States Department of Agriculture (USDA) to offer to enter into a contract with each eligible peanut quota holder for the purpose of providing compensation for the lost value of the quota on account of the repeal. The Act provides for five annual, equal payments of 11? per pound of peanut quota to be paid during 2002 through

October 21, 2002

715

2002?42 I.R.B.

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